[Federal Register Volume 62, Number 148 (Friday, August 1, 1997)]
[Rules and Regulations]
[Pages 41794-41799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20395]



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Part VI





Department of Agriculture





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Rural Housing Service



Rural Business-Cooperative Service



Rural Utilities Service



Farm Service Agency



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7 CFR Part 1951



Handling Payments From the Farm Service Agency (FSA) to Delinquent FSA 
Farm Loan Program Borrowers; Rule

  Federal Register / Vol. 62, No. 148 / Friday August 1, 1997 / Rules 
and Regulations  

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DEPARTMENT OF AGRICULTURE

Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency

CFR Part 1951

RIN 0560-AE93


Handling Payments From the Farm Service Agency (FSA) to 
Delinquent FSA Farm Loan Program Borrowers

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service, 
Rural Utilities Service, Farm Service Agency, USDA.

ACTION: Interim final rule with request for comments.

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SUMMARY: The issuing USDA agencies are revising their regulations for 
the use of administrative offset to collect delinquent debts due under 
programs formerly administered by the Farmers Home Administration 
(FmHA). This action will eliminate the provisions currently contained 
in the regulation and provide that the Rural Housing Service, Rural 
Business-Cooperative Service, Rural Utilities Service and Farm Service 
Agency, Farm Loan Programs (the Agencies) will instead adhere to the 
requirements in the existing United States Department of Agriculture 
administrative offset regulations. This rule eliminates the requirement 
that a borrower's account be accelerated prior to offset of payments 
from a Federal agency to delinquent borrowers. This rule will improve 
collection procedures through an increase in the use of administrative 
offset to collect delinquent debts owed the Federal government. 
However, the changes primarily affect Farm Loan Program borrowers of 
the FSA. The Agencies Internal Revenue Service (IRS) and Federal salary 
offset regulations are not revised by this rule.

DATES: The effective date of this interim final rule is August 1, 1997. 
Comments on the interim final rule, or comments on alternatives to this 
rule, or the revision and extension of the information collection 
requirements must be received on or before September 30, 1997.

ADDRESSES: Send comments on the interim final rule to: Director, Farm 
Loan Programs Loan Servicing and Property Management Division, USDA/
FSA/LSPMD/STOP 0523, 1400 Independence Avenue, SW, Washington, D.C. 
20250-0523. All written comments received in connection with this rule 
will be available for public inspection during regular working hours at 
the above address.

FOR FURTHER INFORMATION CONTACT: Jerry P. Wishall, Senior Loan Officer, 
Farm Loan Programs Loan Servicing Division, USDA/FSA/LSPMD/STOP 0523, 
1400 Independence Avenue, SW, Washington, D.C. 20250-0523, telephone 
(202) 720-1651, facsimile (202) 690-0949 or (202) 720-7686, e-mail: 
[email protected]

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been reviewed under Executive Order 12866, has been 
determined to be a significant regulatory action, and has been reviewed 
by the Office of Management and Budget.

Executive Order 12372

    The programs to which this Executive Order may apply are listed in 
the Catalog of Federal Domestic Assistance under the following:

10.404  Emergency Loans
10.405  Farm Labor Housing Loans and Grants
10.406  Farm Operating Loans
10.407  Farm Ownership Loans
10.410  Very Low to Moderate Income Housing Loans
10.411  Rural Housing Site Loans and Self-Help Housing Land 
Development Loans
10.415  Rural Rental Housing Loans
10.416  Soil and Water Loans
10.417  Very Low-Income Housing Repair Loans and Grants
10.420  Rural Self-Help Housing Technical Assistance
10.421  Indian Tribes and Tribal Corporation Loans
10.427  Rural Rental Assistance Payments
10.433  Rural Housing Preservation Grants
10.435  Certified Mediation Program

    Programs listed under the numbers 10.405, 10.411, 10.415, 10.416, 
10.420, 10.427, and 10.433 are subject to and have complied with the 
provisions of Executive Order 12372. (See the notices related to 7 CFR 
3015, subpart V, at 48 FR 29112, June 24, 1983; 49 FR 22675, May 31, 
1984; 50 FR 14088, April 10, 1985.)

Environmental Impact Statement

    It is the determination of the issuing agencies that this action is 
not a major Federal action significantly affecting the environment and, 
in accordance with the National Environmental Policy Act of 1969, Pub. 
L. 91-190, an Environmental Impact Statement has not been prepared.

Executive Order 12988

    This rule has been reviewed in accordance with Executive Order 
12988, Civil Justice Reform. In accordance with this rule: (1) All 
State and local laws and regulations that are in conflict with this 
rule will be preempted; (2) no retroactive effect will be given to this 
rule: and (3) administrative proceedings in accordance with 7 CFR parts 
11 and 780, as applicable, must be exhausted before bringing suit in 
court challenging action taken under this rule unless those regulations 
specifically allow bringing suit at an earlier time.

Regulatory Flexibility Act

    The Farm Service Agency (FSA) certifies that this rule will not 
have a significant impact on a substantial number of small entities as 
defined under the Regulatory Flexibility Act, Pub. L. 96-534, as 
amended (5 U.S.C. 601). No actions are being taken under this rule that 
would favor large entities over small entities. According to the 1992 
Census of Agriculture, 1.9 million farmers or over 99 percent of all 
farms in the United States are small entities as defined by the Small 
Business Administration (SBA). Under the SBA definition, few if any 
large entities are operators of family-sized farms who would be 
eligible for FSA credit. This rule is expected to result in the offset 
of payments from an average of approximately 4,000 borrowers per year 
which is less than 1 percent of 1.9 million farmers. Also, this rule 
requires small entities to do no more than large entities to 
participate in the affected programs. Therefore, a Regulatory 
Flexibility Analysis has not been prepared.

Paperwork Reduction Act

    The amendments to 7 CFR part 1951 contained in this rule involve a 
change in existing information collection requirements that were 
previously approved by OMB under the provisions of 44 U.S.C. chapter 35 
and assigned OMB control number 0575-0119. Emergency clearance for 
revision and extension of the information collection has been approved. 
In the proposed rule published on August 30, 1996, FSA provided notice 
of its intent to request approval of the information collection under a 
new OMB control number in order to accommodate the separation of 
programs resulting from the reorganization of USDA. FSA however 
continues to share 7 CFR 1951-C with Rural Development and therefore is 
now providing notice of the intent to request approval of the revision 
and extension of information collected under OMB control number 0575-
0119.
    OMB Control Number 0575-0119.
    Title: Offset of Federal Payments to USDA Agency Borrowers.

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    Type of Request: Revision and extension of Currently Approved 
Information Collection.
    Abstract: 7 CFR part 1951, subpart C, requires that a borrower's 
account be accelerated and the borrower's appeal rights be exhausted 
before offsetting any payments to be received by the borrower. The 
Department of Agriculture Reorganization Act combined the farm loan 
program functions of FmHA and the former Agricultural Stabilization and 
Conservation Service (ASCS), into the Farm Service Agency (FSA). This 
results in FSA making payments generated from participation in the 
former ASCS programs to the same farmer or rancher that is delinquent 
on his debts to the Agency. Acceleration of a borrower's account is one 
of the last steps FSA takes before liquidating the account. This 
process may take years while the borrower continues to receive payments 
from FSA.
    This rule removes the existing administrative offset regulation 
which was used by the Agencies when they were a part of the former 
Farmers Home Administration (FmHA). The Department of Agriculture has a 
existing administrative offset regulation at 7 CFR subpart 3, subpart B 
and the administrative offset regulation of the former FmHA in 7 CFR 
part 1951, subpart C is redundant. The Department of Agriculture 
regulation complies with the requirements of 31 U.S.C. 3716, as amended 
by the Debt Collection Improvement of 1996, ch. 10 of Pub. L. 104-134 
(April 26, 1996).
    One intended effect of using the existing Department of Agriculture 
administrative offset procedure is that the Department procedure does 
not contain the restrictive provision of the former FmHA offset 
regulation which requires the account to have been accelerated prior to 
using administrative offset. There is no statutory basis for delaying 
offset until after a loan has been accelerated and the Department 
administrative offset procedure will permit offset to be utilized for 
debts which are past due. The information collection requirements for 
this type of internal agency offset will decrease, due to the 
development of a shortened notification letter, streamlining of the 
offset process, and the reduction of the number of notices and number 
of meetings offered. However, the easing of the offset procedures will 
greatly increase the number of FSA borrowers that receive notices and 
accounts that are offset. For example as of March 30, 1996, 1,588 FSA 
borrowers were accelerated, whereas 27,180 borrowers were past due.
    Estimate of Burden: Public reporting burden for this information 
collection is expected to average .6 hours per response.
    Respondents: Program borrowers that are over 30 days past due.
    Estimated Number of Respondents: 9,350.
    Estimated Number of Responses per Respondent: .6.
    Estimated Total Annual Burden on Respondents: 5,493 hours.
    The subject regulation is published for public review and comment. 
Additional copies of the interim final rule or copies of the referenced 
forms may be obtained from Barbara Williams, Regulations and Paperwork 
Management Branch, Support Services Division at (202) 720-9734. 
Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Agency, including whether the information will have practical 
utility; (b) the accuracy of the Agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical or other technological collection techniques or 
other forms of information technology.
    All responses to this notice will be summarized, included in the 
request for OMB approval, and will become a matter of public record. 
Comments should be submitted to the Desk Officer for Agriculture, 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Washington, D.C. 20503, and to Barbara Williams, Regulations 
and Paperwork Management Branch, Support Services Division, U.S. 
Department of Agriculture, Rural Housing Service, STOP 0743, 1400 
Independence Avenue, SW., Washington, D.C. 20250-0743. A comment to OMB 
is best assured of having its full effect if OMB receives it within 30 
days of publication of this rule.

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments or the private sector. Under section 202 of the UMRA, 
agencies must prepare a written statement, including a cost benefit 
assessment, before promulgating a notice of proposed rule making that 
includes any Federal mandates that may result in expenditures to State, 
local, and tribal governments, in the aggregate, or to the private 
sector, of $100 million or more in any 1 year. When such a statement is 
needed for a rule, section 205 of the UMRA generally requires agencies 
to identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost affective or least burdensome 
alternative that achieves the objectives of the rule.
    The rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector. Thus, today's rule is not subject to 
the requirements of sections 202 and 205 of the UMRA.

Discussion of the Interim Final Rule

    This rule involves the credit programs formerly administered by 
FmHA. The Department of Agriculture Reorganization Act of 1994, Pub. L. 
103-354, abolished FmHA on October 20, 1994, and its functions were 
transferred to the Agencies.
    FSA is taking this action for several reasons. Most importantly, 
this change is being made to increase the tools available to the Agency 
to collect delinquent debts to the government. Administrative offset is 
currently under-utilized because Agency administrative offset 
regulations require that a borrower's promissory notes be accelerated 
before offset can be used to collect the debt. This restricts the 
Agency s ability to collect from producers that have defaulted on a 
debt to the Agency by delaying the offset of FSA program payments such 
as those derived from the Conservation Reserve Program (CRP) or 
Production Flexibility Contracts (PFC). Due to the procedures required 
for FSA to accelerate notes, an account may have been in default for 
many months while the borrower continues to receive income from the 
Agency. For example, FSA records indicate that in the Agency's fiscal 
years 1994 and 1995, 711 CRP contract payments totaling over $5.5 
million were made to seriously delinquent borrowers that were not 
subject to offset. It is fiscally irresponsible for a Federal agency to 
continue making substantial contract payments to someone who is 
seriously delinquent on his or her government debts.
    Also, the Agency must make this change because Congress has amended 
the Federal Claims Collection Act (31 U.S.C. 3716) through passage of 
the Debt

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Collection Improvement Act of 1996 (DCIA) (Chapter 10 of Pub. L. 104-
134, April 26, 1996). This Act requires Federal agencies to attempt 
administrative offset before making Federal payments to someone that 
has defaulted on a government debt. Under the current constraints of 7 
CFR part 1951, subpart C, FSA cannot consider offsets and must continue 
to make payments to a defaulted borrower in violation of DCIA until the 
account is accelerated.
    The Agency is making this change by removing the existing 
administrative offset regulation used by the Agencies when they were a 
part of FmHA. The Department of Agriculture has an existing 
administrative offset regulation at 7 CFR part 3, subpart B that 
satisfies the administrative offset needs of the Agencies and is 
consistent with the requirements of DCIA. This subpart contains 
provisions that are very similar to the administrative offset 
regulation of the former FmHA contained in 7 CFR part 1951, subpart C, 
except it does not require a borrower's account to have been 
accelerated. Adoption of the Departmental Regulations and removal of 
Agency regulations will also assist in the Agency s efforts to 
streamline regulations and reduce FSA paperwork by removing several 
pages of unnecessary regulations from Chapter XVIII of the CFR. This 
amendment also makes the administrative offset process for FSA Farm 
Loan Programs more consistent with the collection procedures of the 
remainder of FSA.

Discussion of Comments Received

    This interim rule implements the changes proposed in a rule 
published on August 30, 1996, (61 FR 45907) with a comment period 
ending September 16, 1996. Comments were received from 72 parties prior 
to expiration of the comment period. Nine comments were received after 
the deadline and were not considered. However, their comments and 
recommendations were very similar to others received and are probably 
addressed in this discussion. Comments were received from several 
groups representing the government, the farming community and the 
agricultural lending community. Comments were received from two United 
States Senators, two United States Representatives, 21 banks, two State 
banking organizations, the National Farmers Union, an FSA State office, 
a rural electric cooperative, six family farmer advocacy organizations, 
a State department of agriculture, eight State rural rehabilitation 
corporations and two State development authorities. Several commenters 
praised the Agency's efforts to collect from delinquent borrowers; 
however, every commenting party expressed concerns about possible 
negative impacts of the rule and requested that this rule not go 
forward as planned.
    The respondents comments are addressed as follows in an order based 
on volume of responses received. Comments of a similar topic were 
grouped, paraphrased and addressed as one. General comments received 
regarding constitutionality, ethics, fairness and the general mission 
of the Agency's loan programs were not specifically addressed, but may 
be addressed in context.

Extend the Comment Period

    The Agency received 44 requests for an extension of the 15-day 
comment period on the proposed rule. That was the only comment from 32 
respondents, and 28 of these were identical form letters. The requested 
extensions ranged from 60 days to 6 months. Many of the commenters 
noted that the comment period on the proposed rule was shortened in an 
attempt to offset the September AMTA checks and that is now impossible. 
In conjunction with a request for a comment period extension, many of 
these parties also requested Congressional hearings, public meetings 
and other means to conduct a broader study of the potential impacts of 
this regulation change. In response to these comments, the Agency has 
decided to implement this change through publication of an interim 
final rule and request for additional comments. This method will allow 
further opportunity for public comment while allowing FSA to begin 
administrative offset of program payments due to be paid to delinquent 
borrowers in 1997.

Adverse Effect on Agriculture Lending Community and Restriction of 
Credit

    Many comments were received from private lenders and banking 
organizations expressing concern about the potential negative impact of 
this rule. These commenters indicated that this rule will result in a 
restriction on loans to farmers for the production of crops because 
many of these loans are dependent upon FSA program payments for 
repayment. The respondents suggest that a lender will deny credit to a 
farm borrower due to inadequate cash flow as a result of not being able 
to include FSA program payments in their annual cash flow projections. 
Several commenters also stated that bank rating agencies, such as the 
Federal Deposit Insurance Corporation (FDIC) or the Office of the 
Comptroller of the Currency (OCC) would rate as adverse any loans that 
were dependent upon program payments for repayment. Similarly, several 
respondents commented that this rule may make it difficult for a 
borrower to pay irrigation accounts, credit accounts at farm supply 
dealers, and other debts. Commenters requested that the Agency honor an 
assignment or abide by Uniform Commercial Code (UCC) lien priorities on 
payments, regardless of the status of the borrower's government loan. 
Respondents suggested if the Agency proceeds with this change, FSA 
should inform creditors and suppliers of the status of an FSA 
borrower's loans.
    As stated earlier, the intention of this rule is to increase the 
use of administrative offset to pay Federal debt. The Agency does not 
expect the availability of credit in rural areas to decrease as a 
result. Generally, credit decisions are based on an analysis of the 
total quality of an applicant's business, including the status of their 
government loans. A prospective borrower's cash flow projections for 
the upcoming production cycle are typically based on proven performance 
capabilities and includes all income, expenses and debt payments. Since 
this projection would include planned receipts from FSA program 
payments and payments on FSA loans, a positive projection will likely 
result in loan approval. If repayment is dependent on FSA program 
payments, it may result in the denial of an annual operating loan to a 
producer who is delinquent on his or her FSA farm credit loan if 
administrative offset is a certainty. If a borrower is delinquent on 
his or her loan with the Government, to the extent that offset may be 
made, the availability of credit from commercial sources is doubtful in 
any event.
    FSA is in the process of amending its credit reporting procedures 
to conform more closely to those in the commercial and consumer lending 
community by reporting delinquent farm loan program borrowers to credit 
reporting bureaus in accordance with the requirements of DCIA. This 
will reduce the likelihood of a lender extending credit without 
knowledge of the status of a borrower's FSA loan. In the case of a 
borrower who is current on their FSA loan, this rule is not likely to 
affect their ability to obtain credit. As far as lender regulatory 
agencies are concerned, they are likely to view an annual production 
loan that was approved by a lender without a complete business 
projection as a potential problem loan and request appropriate 
corrective action, regardless of the potential for administrative 
offset. As one commenter indicated, OCC bases their standards on the 
borrower's ability

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to pay and this includes all income and all debt payments. Also, the 
Agency's guaranteed loan program, which guarantees a lender against up 
to 90 percent of any loss of principal and interest, may be used by 
lenders to reduce their risk. This program requires a positive cash 
flow considering all income sources and debt payments. As stated by 
several commenters, FSA typically requires lenders to take an 
assignment of farm program payments; but we expect few if any loans to 
be approved with FSA income enhancement program payments as the sole 
planned source of repayment. If the borrower becomes delinquent on the 
borrower's direct loans and this payment is offset, it may be necessary 
to service the guaranteed loan under one or more of the authorities 
contained in 7 CFR part 1980, subpart B.
    With regard to assignments, lien position, and bankruptcy this rule 
changes little. Administrative offset has been available and utilized 
for many years and a lien or assignment has had no effect when a debtor 
owes money to a Federal agency. As stated earlier, this rule will 
increase the use of administrative offset and lenders will have to 
factor this into their loan making decisions. Nevertheless, when the 
Agency assigns the FSA program payments that are to be paid to a 
borrower that is current on his or her farm loan program loan at the 
time of the assignment, the Agency expects the large majority of these 
assignments to be honored. If default occurs, the Agency will do what 
it can to assist the borrower in maintaining a viable operation, while 
taking the necessary actions to protect the government's interests. 
However, there is no assurance that administrative offset would not be 
used. In the case of bankruptcy, FSA and all creditor collection 
actions cease and the court will determine the uses of income, 
distribution of security and disposition of debt.
    Aside from reporting to credit bureaus, FSA will not automatically 
inform another lender that a borrower has become delinquent on a loan 
as requested by commenters. This notification would be inconsistent 
with the requirements of the Privacy Act. However, as a result of farm 
visits and other normal servicing of the loan, it is likely that a 
lender that has extended operating credit will likely be aware of 
repayment problems that may result from a decline in production and the 
related risk of administrative offset. A natural disaster or unforeseen 
drop in sales would require a joint effort from all creditors and 
possibly the use of other FSA loan servicing authorities to correct the 
delinquency and maintain the operation. If the borrower becomes 
delinquent but can work out an agreement with the Agency to make the 
payment, any assignment that was provided will be honored.
    Furthermore, under the DCIA, a person is precluded from obtaining 
any Federal financial assistance in the form of a loan (other than a 
disaster loan), loan insurance, or a loan guarantee, while that person 
is delinquent on a Federal debt, unless the head of the Agency waives 
this prohibition. Therefore, the commenters' recommendations were not 
adopted. If the Agency finds that the increased use of administrative 
offset results in difficulty for agricultural producers to obtain 
loans, FSA will consider taking actions to rectify any such problems.
    Several commenters addressed the Agency's plans to issue internal 
instructions for field office use in connection with this interim final 
rule. The respondents indicated that the proposed rule was vague 
regarding FSA's intentions to administratively allow waiver of the 
offset. These instructions are to provide a consistent definition of 
delinquency and timing of notification, a guide letter containing the 
requirements of 7 CFR 3.25, and the national policy regarding the 
documentation necessary to fulfill the requirements for a written 
repayment agreement under 7 CFR 3.28. This is intended to ensure that 
policies and paperwork requirements are uniformly applied nationwide. 
These instructions will be available from local FSA offices upon 
request.

Violation of the Agriculture Credit Act of 1987 (7 U.S.C. 1985)

    Several commenters stated that this rule would violate the 
Agricultural Credit Act of 1987 (Ag Credit Act) as amended by the Food, 
Agriculture, Conservation, and Trade Act of 1990 and the Federal 
Agricultural Improvement and Reform Act of 1996 (1996 Act). This Act 
provides that ``the Secretary shall release from the normal income 
security provided for such loan an amount sufficient to pay for the 
essential household and farm operating expenses of the borrower, until 
such time as the Secretary accelerates such loan.'' The Agency has 
promulgated regulations at 7 CFR 1962.17 to implement this requirement.
    Administrative offset and releases for essential expenses are 
separate issues and the requirements of 7 CFR 1962.17 are not affected 
by this change. FSA program payments will be administratively offset 
prior to acceleration of the loan. However, offset is not the exercise 
of collection from security. Offset is the administrative collection of 
a debt due from funds due under another Government program. FSA may not 
have a security interest in that payment or may have or may not have a 
first security interest therein. FSA payments are not subject to 
attachment, garnishment or lien interest until paid. Offset intercepts 
these payments before they are made. The amounts obtained are not 
normal income security and under DCIA may not be payable at all.
    In another comment a respondent noted that the Agency has notified 
many delinquent borrowers by sending exhibit A of 7 CFR part 1951, 
subpart S that they would not be subject to administrative offset until 
their account is accelerated. Therefore, they suggested that offsets 
could not be employed to collect from these borrowers. This comment was 
not adopted by the Agency. Notification to the borrower that offset 
will not be used prior to acceleration does not create a binding 
obligation by FSA to waive the offset forever. The Agency has 
determined that the notification procedures under 7 CFR part 3, subpart 
B, will provide the borrower with adequate notice of the intent to 
offset and will specifically terminate the previous advice. The 
language informing delinquent borrowers that FSA may offset only after 
acceleration has been removed from the notices.
    Several respondents stated that if the Agency had agreed to release 
program payments on Form FmHA 1962-1, Agreement for the Use of 
Proceeds/Release of Chattel Security, the Agency cannot alter this 
agreement. In addition to the fact that these funds are not security 
(as set out above), the Agency has authority to revise this agreement. 
Form FmHA 1962-1 is based on the upcoming year's projections contained 
on a Form FmHA 431-2, Farm and Home Plan, (farm plan) that was 
completed by the borrower in accordance with 7 CFR part 1924, subpart 
B. If the actual proceeds from the sale of chattel security are 
substantially different from the plan, then the Form FmHA 1962-1 may be 
revised. This form is revised whenever significant changes occur during 
the year that will affect a borrower's repayment ability. If the 
borrower and Agency cannot reach an agreement on revisions to the farm 
plan, the borrower may appeal. If the borrower refuses to execute Form 
FmHA 1962-1 as developed by the Agency after an appeal, the account 
will be serviced under 7 CFR 1962.18. If the borrower

[[Page 41798]]

does not appeal, the planned releases documented on the revised Form 
FmHA 1962-1 are binding.

Effect of National Appeals Division

    Several commenters indicated that the proposed rule violated the 
National Appeals Division (NAD) provisions of the Department of 
Agriculture Reorganization Act of 1994 (1994 Act). Appeals of Agency 
decisions to collect by offset will be heard and decided by NAD in 
accordance with the offset regulations in 7 CFR part 3, subpart B, and 
NAD regulations at 7 CFR part 11.

Effect of Federal Court Ruling

    Several respondents commented that this rule violated the Federal 
court ruling against USDA in the case of Coleman v. Block (562 F. Supp. 
1353 (D.N.D. 1983); 580 F. Supp. 192 (D.N.D. 1983); 580 F. Supp. 194 
(D.N.D. 1984)). This ruling requires FSA to give farmers sufficient due 
process notification prior to taking forced collection actions. 
Similarly, several commenters felt that the proposed rule was 
unconstitutional because it deprived borrowers of their constitutional 
rights of due process. The Agency agrees with the commenters that 
notification is required before administrative offset. We disagree that 
this rule violates due process provisions since under this regulation 
all borrowers will receive notice of, and an opportunity to, challenge 
the impending offset. The due process considerations required under 
Coleman and the Ag Credit Act are contained in 7 CFR part 1951, subpart 
S. The Coleman decision did not involve the Agency's administrative 
offset regulations and the acceleration requirement contained in 7 CFR 
1951.103 was not added as a result of the subject litigation or the 
subsequent Ag Credit Act. In addition, 7 CFR part 3, subpart B contains 
certain due process requirements that must be followed before offset 
may be initiated. Regardless, the DCIA applies to all Federal loan 
programs and contains no exceptions for the loans of the former FmHA. 
This Act supersedes current regulations and any requirement that is 
legally inconsistent is rendered obsolete.
    The Departmental Regulation at 7 CFR part 3, subpart B, contains 
similar protections for the borrower as the regulation that is being 
deleted, except for the acceleration requirement. The feasibility of an 
offset must be determined on a case by case basis; the practicality of 
the offset must be determined; borrowers must be given 30 days notice 
prior to offset; a borrower has 20 days to request a meeting after 
receiving notice; the borrower may request a review of the offset by an 
Agency official, the borrower may review the Agency's records; and the 
borrower may reach a payment agreement with the Agency in lieu of the 
offset.
    At least six respondents commented that the Agency should attempt 
to correct a delinquency under 7 CFR part 1951, subpart S, prior to 
administrative offset. This comment is related to that of others who 
suggested that the Agency more clearly define past due and not send the 
notice of intent to collect by administrative offset until the borrower 
is at least 90 days or up to 180 days past due. Notification 
requirements for administrative offset are separate from those of debt 
restructuring. When the necessary procedure has been completed, 
administrative offset will be taken regardless of the status of any 
request for servicing under the provisions of 7 CFR part 1951, subpart 
S.
    The comment that requested that borrowers be allowed to become at 
least 90 days or up to 180 days past due before offsetting a payment 
was considered. Due to the notification requirements discussed above, 
and the statute, the application of these procedures will correspond to 
the request for at least a 90 day delay. Notice of offset may not occur 
until notice under Sec. 331D of the Consolidated Farm and Rural 
Development Act has been provided. The Agency's administrative 
requirements will provide for the Notice of Intent to Collect By 
Administrative Offset simultaneously with or subsequent to the notice 
required by Sec. 331D. Due to most FSA loan payments being due annually 
from January to May, if the recommendation that the Agency not begin 
offset procedures until the borrower is 180 days past due were adopted, 
any FSA program payments made through at least June of every year would 
not be subject to offset on newly delinquent accounts. Therefore, this 
recommendation was not adopted in this rule.
    Other miscellaneous comments were received that could be 
paraphrased as general opposition to the proposal. At least four 
commenters suggested that this change is not required to expedite 
administrative offset. They indicated that the Agency's loan servicing 
and appeal regulations have required time frames for actions that, if 
properly followed, would result in account acceleration much earlier 
than the months or years cited in the proposed rule. The Agency agrees 
that employee oversight may result in cases of extended loan servicing. 
However, even if every time frame contained in regulations is precisely 
followed, it may result in acceleration taking long enough to allow a 
seriously delinquent borrower to obtain several payments before offset 
could be put into place. The Agency did not adopt this comment.
    Immediate implementation of the rule is needed to comply with the 
requirements of 31 U.S.C. 3716 as amended by the Debt Collection 
Improvement Act of 1996, ch. 10 of Pub. L. 104-134 (April 26, 1996). 
The changes are needed because as pointed out by a recent OIG 
Management Alert over $65 million was paid out to delinquent farm 
borrowers in 1995 and 1996. Of the $30.5 million paid to the 4,015 
delinquent borrowers in calendar year 1996, $22 million were AMTA (also 
known as PFC) payments and $5.5 million were CRP payments. The Agency 
could collect several million dollars on delinquent farm loans if this 
request is approved and the new regulation is in place prior to these 
payments being made provided the rule is implemented immediately. The 
next round of FSA payments to farmers will occur in September 1997, 
therefore it is critical that this rule be published immediately.

List of Subjects in 7 CFR Part 1951

    Accounting, Accounting servicing, Credit, Disaster assistance, Loan 
programs--Agriculture, Low and moderate income housing.

    Accordingly, part 1951 of Chapter XVIII of Title 7 of the Code of 
Federal Regulations is amended as follows:

PART 1951--SERVICING AND COLLECTIONS

    1. The authority citation for part 1951 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 U.S.C. 3716; and 42 
U.S.C. 1480.

    2. Section 1951.101 is revised to read as follows:


Sec. 1951.101  General.

    The Federal Claims Collection Act of 1966 as amended by the Debt 
Collection Act of 1982, the Deficit Reduction Act of 1984, and the Debt 
Collection Amendments Act of 1996 provides for the use of 
administrative, salary, and Internal Revenue Service (IRS) offsets by 
government agencies, including the Farm Service Agency (FSA), Rural 
Housing Service (RHS), Rural Utility Service (RUS) for its water and 
waste programs, and Rural Business-Cooperative Service (RBS), herein 
referred to collectively as ``USDA Agency,'' to collect delinquent 
debts.

[[Page 41799]]

Any money that is or may become payable from the United States to a 
individual or entity indebted to a USDA Agency or other individual or 
entity indebted to a USDA Agency may be subject to offset for the 
collection of a debt owed to a USDA Agency. In addition, money may be 
collected from the debtor's retirement payments for delinquent amounts 
owed to the USDA Agency if the debtor is an employee or retiree of a 
Federal agency, the U.S. Postal Service, the Postal Rate Commission, or 
a member of the U.S. Armed Forces or the Reserve. Amounts collected 
will be processed as regular payments and credited to the borrower's 
account. USDA Agencies will process requests by other Federal agencies 
for offset in accordance with Sec. 1951.102 of this subpart. This 
subpart does not apply to direct single family housing loans.
    3. Section 1951.102 is revised to read as follows:


Sec. 1951.102  Administrative offset.

    Action to effect administrative offset to recover delinquent claims 
may be taken in accordance with the procedures in 7 CFR part 3, subpart 
B.


Secs. 1951.103-1951.105  [Removed and Reserved]

    4. Sections 1951.103 through 1951.105 are removed and reserved.
    5. Section 1951.111 is amended in introductory text paragraph (a) 
and (a)(2) by changing the words ``FmHA or its successor agency under 
Public Law 103-354'' to read ``USDA Agency''; by revising the phrase 
``FmHA or its successor agency under Public Law 103-354's'' in 
paragraph (a)(1) to read ``USDA Agency''; by amending paragraph (b)(1) 
by adding the words ``State Executive Directors;'' after the words 
``State Directors;'' and by revising the introductory text to read as 
follows:


Sec. 1951.111  Salary offset.

    Salary offset may be used to collect debts arising from delinquent 
USDA Agency loans and other debts which arise through such activities 
as theft, embezzlement, fraud, salary overpayments, under withholding 
of amounts payable for life and health insurance, and any amount owed 
by former employees from loss of federal funds through negligence and 
other matters. Salary offset may also be used by other Federal agencies 
to collect delinquencies or debts owed to them by employees of the USDA 
Agency, excluding County Committee members. Administrative offset, 
rather than salary offset, will be used to collect money from federal 
employee retirement benefits. Salary offset will not be initiated until 
after other servicing options available to the borrower have been 
utilized. In addition, for Farm Loan Programs loans, salary offset will 
not be instituted if the federal salary has been considered on the Farm 
and Home Plan, and it was determined the funds were to be used for 
another purpose other than payment on the USDA Agency loan. When salary 
offset is used, payment for the debt will be deducted from the 
employee's pay and sent directly to the creditor agency. Not more than 
15 percent of the employee's disposable pay can be offset per pay 
period, unless the employee agrees to a larger amount. The debt does 
not have to be reduced to judgment or be undisputed, and the payment 
does not have to be covered by a security instrument. This section 
describes the procedures which must be followed before the USDA Agency 
can ask a Federal agency to offset any amount. Decisions made under 
this section are subject to the appeal procedures of 7 CFR part 11.
* * * * *
    Signed in Washington, D.C., on July 25, 1997.

    Dated: July 25, 1997.
James W. Schroeder,
Acting Under Secretary for Farm and Foreign Agricultural Services.
Jill Long Thompson,
Under Secretary for Rural Development.
[FR Doc. 97-20395 Filed 7-31-97; 8:45 am]
BILLING CODE 3410-05-P